Looking into the Sao Paulo turmoil

January 15, 1999:
Thanong Khanthong offers a guide to the Brazilian crisis.

Does the real devaluation indicate that the global
financial crisis is far from over?

The global crisis is certainly not over yet. It just highlights how vulnerable emerging
markets are. The crisis in Brazil gives a bad name to emerging markets, resulting in
capital flowing back to the US and Europe. The Thai government's plan to issue global
bonds will have to be further delayed owing to the Brazilian crisis.

Brazil adopted a wider trading band for the real on Wednesday, which resulted in an 8
to 10 per cent devaluation of the currency immediately. Yet there is the belief that it
can fall by as much as 12 per cent against the US dollar this year. Naturally, the
instincts of panicked financial markets is to focus on two questions: Is Brazil going to
have enough reserves to defend its currency and is the devaluation deep enough?

How will the Brazilian crisis affect Thailand?

Thai leaders have assured us that the impact on Thailand will be largely psychological
at this point. But the effect on Thai exports to Latin America and the US market in the
long-term will be closely monitored. For if Brazil is to get into serious trouble, it will
affect the US economy.

Last year the value of Thai exports to Brazil reached Bt6.68 billion, compared to the
Bt7.16 billion in imports. Still Brazil accounts for about half of Thailand's export to
Latin America. Most of Thai exports to Brazil are video and audio equipment, computers and
parts, air-conditioners and parts, television sets and parts. Rice, rubber, plastic
pellets, steel products are also important products.

As far as the baht and the US dollar are concerned, the baht hit Bt37 against the
greenback at one point, reflecting that the market is alert to the turmoil in Brazil.
Local analysts believe the baht is now on the strong side and can weaken further. The
worst case scenario is Bt40 to the US dollar, but this level will make Thai exporters
happy. Now the market is digesting how Brazil will affect the US market. If US markets are
hit, it will have a domino effect on global markets.

Why is Brazil still facing a crisis despite getting a $41 billion pre-emptive package
from the International Monetary Fund?

The $41 billion IMF package for Brazil looks fine and represents, for the first time,
that the IMF and donor countries have come to a rescue of a nation before the crisis
becomes full-blown. The rescue package was put together in September after Russia devalued
its rouble in August and declared a debt moratorium, which rattled global financial
markets. The stabilisation package requires Brazil to follow fiscal austerity to improve
its public finance, including structural reform to win back international confidence.
Still, Brazil lost $20 to $30 billion in foreign exchange reserves in late 1998 from the
flight of capital.

Losing confidence is even worse than losing reserves. The main issue is that the
country offers a lot of promise but never fulfills reform pledges. When the Minas Gerais,
the local government, announced on Jan 7, 1999, that it would halt its debt payment of $15
billion to the federal government by 90 days, investors made it to the exit. The real
plunged to 1.21 compared with 1.12 at the beginning of the year. Investors were also
concerned with its high foreign debts of $250 billion.

That is the reason why Brazil continues to lose its foreign exchange reserves from $74
billion in July last year to $36 billion as of early January 1998. A comfortable foreign
exchange reserve for Brazil is $50 billion.

Why is the US readily standing by to assist Brazil?

Brazil is considered the US' backyard. US banks have a credit exposure of around $20
billion in Brazil which accounts for about 2 per cent of the total US exports, compared to
20 per cent for the whole of Latin America. Brazil also dominates Latin America by
accounting for about 45 per cent of the region's gross domestic product. Argentina exports
about 30 per cent of its goods to Brazil. If Brazil is to go under, it will have an
adverse impact on the US, particularly in the bubble US stock market.